Research

Environmental health risks, property values and neighborhood composition, with Jules Van Binsbergen, Joao Cocco and S.Lakshmi Naaraayanan.    

Abstract

We quantify the impact of environmental health risk on property values and neighborhood composition. Following a plant’s first reported carcinogenic emission, we observe a 1% decline in property values for houses closer to the plant relative to houses farther away. Exploiting a widely-advertised re-classification of chemical carcinogenicity, we find a 2% relative decline in house prices, underscoring the role of salience. Our analysis reveals a shift towards a higher presence of minority and higher credit-risk households in houses closer to the plant. This evidence of granular changes in neighborhood composition in the wake of a change in perceived environmental health risk informs the debate on environmental justice and health inequities.

Monetary Policy Wedges and the Long-term Liabilities of Households and Firms, with Jules Van Binsbergen.   

Abstract

We examine the impact of monetary policy transmission on households’ and firms’ long-duration liabilities using high-frequency variation in 10-year swap rates around FOMC announcements. We find that mortgage rates respond about three weeks after monetary policy announcements, with a larger response to interest rate hikes compared to cuts in post-2010 data. The strong response of mortgage rates to 10- year swap rates leaves little explanatory power for mortgage concentration or bank market power. Corporate yields respond symmetrically to positive and negative shocks, with a higher sensitivity for firms with lower credit ratings. We show that expected future short rates and interbank market frictions play a significant role in explaining both mortgage rates and corporate bond yields. While the term premium correlates positively with mortgage rates, it has little comovement with corporate bond yields.

Foreign Influence in U.S. politics, with Max Miller and S.Lakshmi Naaraayanan. Online Appendix available here.  An easy-to-read summary   

Abstract

We document that foreign lobbying shapes US government spending and public policy. We introduce a comprehensive dataset of 180,000 date-stamped, in-person meetings between foreign agents and individual US legislators, spanning 2000 to 2018 and covering 146 countries and 1,200 legislators. We find that (1) meetings are positively related to legislator lawmaking effectiveness and membership to foreign affairs committee and (2) foreign agents maintain connections with legislators even after they depart from important committees. Around these meetings, (3) foreign countries benefit from increased financial aid and advantageous product tariffs and (4) foreign firms whose governments lobby more often benefit from larger subsidies and US government contracts. Finally, we study benefits and costs accruing to legislators and show (5) monetary and electoral benefits, but no evidence that US legislators are punished by their constituents because they meet with representatives of foreign countries.

The present value of future market power, with Thummim Cho, Lukas Kremens, Howard Kung

Abstract

We present a new log-linear identity that relates a firm's market value to future markups, output growth, discount rates, and investments in a present-value framework. Expected markups are a dominant contributor to variation in firm values and to the rise in the aggregate market value of U.S. public firms since the 1980s. The rise in aggregate expected markups is driven by reallocation of market share towards higher-markup firms, echoing results for realized markups. Expressing markups in terms of a forward-looking value component rather than realized markups reveals that this reallocation has recently been accelerated by mergers involving highly-valued, high-markup target firms. Expected markups are closely tied to expected fixed costs and investments, including investments in intangibles. We find a  negative time-series relationship between expected markups and discount rates, but a positive cross-sectional link to risk premia after accounting for other risk factors, thus reconciling risk-based arguments with theories tying the rise in market power to the fall in interest rates. 

Cyclical dispersion in expected defaults, with Joao Gomes and Jessica Wachter,  Review of Financial Studies, 32 (4), pp. 1275-1308, April 2019. Online Appendix available here. Working paper available here.

Abstract

A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes. 

Risk-free Interest Rates, with Jules Van Binsbergen and William Diamond, Journal of Financial Economics, 142 (3), pp. 1-29, January 2022 (lead article). Working paper available here.

Daily Data

Abstract

We document differing risk-free rates in a range of asset classes, providing a uniquely clean measure of segmentation between markets. The asset markets we consider are the government bond market, commodity markets for precious metals, exchange rate markets and option markets. We find that risk-free rates across markets can deviate for prolonged periods of time and we characterize market segmentation through the speed of convergence. We analyze how shocks propagate across rate spreads and develop an aggregate arbitrage index which captures the common variation of these spreads across markets. We further present a novel high-frequency measure of the convenience yield on government bonds, which equals 38 basis points on average and grows substantially during periods of financial distress. We argue that option-market-implied risk-free rates provide a convenience-yield-free and effectively credit-risk-free measure of time preference measured accurately at a minutely frequency. This makes such rates a strong candidate for the risk free benchmark rate and we explore a range of empirical asset pricing applications.

Real-time Price Discovery via Verbal Communication: Method and Application to Fedspeak, with Roberto Gomez Cram. Journal of Financial Economics, 143 (3), pp. 993-1025, March 2022. Working paper available here.

Abstract

We study the price discovery process during FOMC days. For several asset classes we find that price movements around the post-meeting statement release are strong predictors of price movements around the subsequent press conference. The correlation is as high as 58% for medium-term Eurodollar futures and 44% for the S&P 500 index. We then use press-conference videos, timestamp the words pronounced, and align them with high-frequency financial data. Minutes in which the Chairman discusses changes in the newly-issued policy statement lie behind the positive correlation. We discuss several potential explanations and consider the implications of our findings for asset pricing and monetary economics.

Follow the money, Online Appendix available here. Review of Economic Studies, 91(2), pp. 1122-1161, March 2024 (Featured Article).Working paper available here.

Abstract

I study, both empirically and theoretically, the economic and financial consequences of corporate lobbying. Firms lobby politicians to increase their share of government contracts, but political competition creates firm-level risk, inflating their cost of capital and reducing their incentive to invest in research and development (R&D). I document an annual 6%–8% return premium for stocks of high-lobbying firms, which compensates investors for political risk. An estimated model in which firms can lobby and innovate and investors are risk averse replicates key features of corporate lobbying in the US, including the well-established paradox that lobbying contributions are small relative to the policies at stake. The model predicts that if investors ceased seeking compensation for political risk, R&D investment would increase by 6% and the innovation rate by 0.4 percentage points. The risk-premium costs of lobbying are quantitatively and economically important even if the resources “wasted” on lobbying are objectively small.

Foreseen Risks, with Joao Gomes and Jessica Wachter. Online Appendix available here.  Journal of Economic Theory, 212, September 2023. Working paper available here.

An easy-to-read summary

Abstract

Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value varies over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.